What Is a Split-Dollar Life Insurance Policy?

Life insurance can be a powerful part of a business owner’s financial strategy — and a valuable benefit for key employees. But the cost of coverage can make it difficult to put in place. A split-dollar life insurance arrangement helps solve this problem by dividing the cost of a policy between two parties, typically an employer and an employee.

For business owners in Fort Myers and across Florida, understanding how these arrangements work can open the door to more affordable, strategic coverage options for both the company and its key people.

What Is Split-Dollar Life Insurance?

Split-dollar life insurance isn’t a distinct insurance product you buy off the shelf. It’s a split-dollar life insurance arrangement — a contractual agreement between two parties, usually an employer and an employee, to jointly purchase and fund a life insurance policy on the employee’s life.

How does split-dollar life insurance work?

A life insurance policy is purchased on an individual (typically a key employee).
The employer pays all or part of the premiums, depending on the terms of the agreement.
When the insured individual passes away, the employer recovers its share of the premiums paid.
The remaining death benefit is paid out to the individual’s named beneficiaries.

Example

Suppose a $200,000 life insurance policy covers an employee, and the employer has paid $28,000 in premiums by the time the employee passes away. Under the split-dollar life insurance agreement:

The employer receives $28,000 (its premium contribution).
The employee’s beneficiaries receive the remaining $172,000.

This structure benefits both sides. The employer recovers the money it put into the policy, and the employee gains access to life insurance coverage at a lower effective cost. In most cases, the death benefit is also income-tax-free for both parties.

Common Uses of Split-Dollar Life Insurance Arrangements

Business owners and companies use split-dollar life insurance arrangements to:

Fund a buy-sell agreement between business partners
Recruit and retain key executives with an attractive, low-cost benefit
Provide affordable life insurance to business owners or employees who might otherwise struggle to qualify or afford full coverage on their own

How Split-Dollar Life Insurance Policies Are Structured

There isn’t just one way to set up a split-dollar arrangement. The three most common structures are outlined below.

1. Individual Ownership With Absolute Assignment

The employee owns the policy and names the beneficiaries.
The employee agrees to repay the employer an amount equal to the premiums the employer paid.
When the employee passes away, the employer is repaid first, and the remaining death benefit goes to the employee’s beneficiaries.
If the employee leaves the company before death, any accumulated cash value is used to repay the employer.

2. Employer as Collateral

The employee purchases the policy and assigns it to the employer as collateral.
The employer pays the premiums in exchange for a security interest in the policy.
This structure ensures the company recovers the money it spent on premiums.

3. Employer-Owned Policy

The employer purchases and owns the policy directly on the employee.
At the employee’s death, the employer receives an amount equal to the policy’s cash value.
Any funds remaining beyond that go to the employee’s beneficiaries.

Costs and Considerations

Like any life insurance policy, the cost of coverage under a split-dollar arrangement depends on factors such as:

The insured individual’s age
Their health
The type and amount of coverage selected

Before setting up a split-dollar life insurance agreement, it’s important to confirm that the individual is insurable.

Policies may also come with additional fees and charges, including:

Mortality and expense charges
Contract limitations
Surrender charges if the policy is terminated early
Possible income tax obligations on early withdrawals

Because these arrangements involve legal, tax, and insurance considerations, business owners — whether in Fort Myers, elsewhere in Florida, or beyond — should carefully review all terms with a qualified financial professional before implementing a split-dollar life insurance plan.

Frequently Asked Questions

What is a split-dollar life insurance policy in simple terms?
It’s an agreement, usually between an employer and employee, to share the cost of a life insurance policy. The employer typically pays some or all of the premiums and is reimbursed from the death benefit, while the rest goes to the employee’s beneficiaries.

How does split-dollar life insurance work when the employee dies?
The employer is repaid its share of the premiums first. The remaining death benefit is then paid, generally income-tax-free, to the employee’s chosen beneficiaries.

Who owns the policy in a split-dollar life insurance arrangement?
It depends on the structure. The employee may own the policy (with an assignment to the employer), the employer may hold it as collateral, or the employer may own the policy outright, depending on which of the three common arrangements is used.

What happens if an employee leaves the company before death?
Under an individual ownership arrangement, any cash value the policy has accumulated is typically used to repay the employer for the premiums it contributed.

Is the death benefit from a split-dollar life insurance policy taxable?
In most cases, the death benefit is income-tax-free for both the employer and the employee’s beneficiaries, though individual circumstances can vary.

Why do businesses use split-dollar life insurance?
Companies use these arrangements to fund buy-sell agreements, attract and retain key executives, and provide affordable coverage to business owners or employees who might not otherwise qualify for or afford a policy on their own.

Considering a split-dollar life insurance arrangement for your business? Speak with a licensed financial professional to review your options and ensure the plan fits your specific goals and tax situation.